Reprinted from the American Economic Review, Vol. IX, No. 4, Decemlser 1919, 
published by the American Economic Association. Inquiries in regard to membership should 
be made to Professor A. A. Young, Cornell University, Ithaca, N. Y. 



635 

S37 

Copy 1 



The Cost of the War and How 
It Was Met 



EDWIN R. A. SELIGMAN 

Columbia University 






THE COST OF THE WAR AND HOW IT WAS MET 

The time has not yet come for a final statement of the fiscal his- 
tory of the war. For one thing, the figures are not yet completely 
available ; and, in the next place, the expenses connected with the 
war are not yet over. It is, however, not premature, one year after 
the declaration of the armistice, to attempt to present in a sum- 
mary fashion a preliminary survey and interpretation of the facts. 
Various ad interim endeavors to present certain phases of the sub- 
ject have already been made.^ 

The problems to which it is desired here to call attention are as 
follows. In the first place, what is meant by the cost of war? 
Secondly, in considering actual governmental outlays, is it desir- 
able to distinguish between the expenditures during the war and 
war expenditures.^ And, if the answer be in the affirmative, how 
are the latter facts to be ascertained? In the third place, from 
what sources were the actual war outlays derived? This intro- 
duces, of course, the question of taxes versus loans. The facts as 
to taxation are first to be secured. Here it will be seen that there 
is considerable confusion as to what is meant by war taxes, and 
that, just as there has been a failure to distinguish between ex- 
penditures of the war period and war expenditures, so the proper 
line has not been drawn between taxation during the war and war 

1 The most valuable presentation of facts for the earlier period of the war 
will be found in the bulletins of the Copenhagen War Study Society and of 
the SocUti de Banque Suisse. Some later figures will be found in L. P. Ayres, 
The War -with Germany, published by the Statistics Branch of the General 
Staff of Washington, 191&. Some computations as to the cost of the war will 
be found in Edgar Crammond's Address on the Cost of the War before the 
Institute of Bankers, London, March, 1919; as well as in Sir Edward Holden's 
The Cost of the War and its Payment in his report to the London City and 
Midland Bank, January, 1919. Facts as to public debts will be found in The 
World's War Debt (Mechanics and Metals National Bank, New York, 1919); 
in The Internal War Loans of Belligerent Countries (National City Company, 
1918) ; and in the article by L. R. Gottlieb on the "Indebtedness of the Prin- 
cipal Belligerents" in the Quarterly Journal of Economics for May, 1919. The 
most valuable document for the earlier period of the war is the report, No. 
4133, to the French Chamber of Deputies, by M. Louis Marin in 1917. By 
aU odds the most complete and valuable studies on the subject are those by 
Professor Gaston Jeze in almost every number of the Revue de Science et de 
Legislation Financi^res. He has dealt particularly with England, France, 
Italy, and Germany in three series of articles entitled respectively "Les Finan- 
ces de Guerre," "Les M^hodes Financi^res," et "Les Emprunts de Guerre." 



740 Edwin R. A. Seligman [December 

taxation. A correct interpretation of the facts will yield some 
rather unexpected results. The fourth problem is that of the 
relative weight attached by different countries to the various cate- 
gories of taxation in raising the necessary revenues. Finally, we 
have to consider the role played by public debts and the relative 
importance attached to long-time and short-period borrowings. 

In order to put the results in the most compact form, a series 
of tables have been constructed. The figures throughout this arti- 
cle have been taken from official sources ;^ and the foreign curren- 
cies have been converted into dollars according to a scale which 
represents their actual pre-war coin value.^ Owing to the depre- 
ciation of the foreign currencies, this naturally gives a somewhat 
exaggerated picture of the existing burdens. 

I 

The cost of the war may mean several different things. In the 
narrower sense, it means the actual money outlay, or expenditure 

2 The ofBcial sources that have been utilized are as follows: 

Great Britain: The various speeches, as found in Hansard, of the chancel- 
lors of the exchequer (Lloyd George, 1914-15; McKenna, 1915-16; Bonar Law, 
1917-18; and Austen Chamberlain, 1919, — the last being his speeches of May 
and June, 1919) and of the Prime Ministers (Asquith and Lloyd George) ; 
the Animal Finance Accounts; the Reports of H. M. Inland Revenue; and the 
Return relating to the National Debt from 1S73 on (cd. 8972, 1918). 

France: The annual reports (Rapports G4n^raux) of the Budget Commis- 
sion; the Expos4 des Motifs du Pro jet de Loi for each of the new revenue 
laws ; and the speeches in the Chamber of Deputies of the Ministers of Finance 
(Ribot, 1915-16; Klotz, 1917-19,— the last being the speech of May 27, 1919). 

Italy: The reports (Relazioni) and speeches of the Ministers of the Treas- 
ury (Carcano, 1916-17; Nitti, 1917-18; Stringher, 1919; Schanzer, 1919,— the 
last being the speech of July, 1919) as well as the studies of Professors Flora, 
Cabiati and Einaudi. 

Oermany: The Reichstag speeches of the Ministers of Finance (Kuhn, 1914- 
15; Helfferich, 1915-lG; von Roedern, 1916-18; Schiffer 1918-19; and Erz- 
berger, 1919, — the last being his speech of October, 1919). 

Russia: The reports of the Ministers of Finance, especially Bark, 1914-16; 
Gukovski, 1916-17; and Tereschenko, 1917. 

Austria-Hungary : The reports of the Budget Commissions. 

Translation of some of these reports will be found in the Bulletin de Statis- 
tique. Excerpts from some of the above reports as well as of the otBcial re- 
ports of other countries will be found in the current numbers of The Econo- 
mist and L'Economiste Europien. 

3 1 £ = $4.87. 1 ruble = 51.5 cents. 

1 franc — 19.3 cents. 1 crown =z 20.3 cents, 

1 mark = 23.8 cents. 1 £ T = $4.40. 



1919] The Cost of the War and How It Was Met 74)1 

in dollars and cents, directly involved in prosecuting the war. In 
the wider sense it includes many items, both direct and indirect, 
which are of significance from the economic point of view. The 
real cost of the war in this sense may mean either the actual loss 
of lives and of property or the diminution of the annual social out- 
put. The direct loss of property is susceptible of fairly accurate 
measure; the cost due to the loss of lives is more difficult to esti- 
mate. Most of the calculations on the latter point have been en- 
tirely arbitrary. So far as the wealth of a country is measured by 
its social income it may be reduced by the actual loss of territory, 
as in Germany and Austria ; by the impairment of its natural re- 
sources such as coal mines and forests, as in France; by the re- 
duction of labor power, due to the wounded workmen or the re- 
sults of starvation on the civilian population, as in most of the 
European countries ; or by the loss of economic efficiency due to a 
lowering of the standard of life or to a change in the attitude 
toward habits of work. The total costs of a war in this sense, al- 
though they are for the most part incalculable, are none the less 
of profound significance. 

In this paper we shall attempt to deal only with the direct money 
costs. These direct money costs or governmental expenditures for 
war include not only the actual outlays for military and naval 
purposes but also the whole range of expenditures incurred in in- 
dustrial life to prepare the wherewithal for the army and navy; 
and they also comprise the sums devoted to the maintenance of the 
families of the soldiers. All these items are far greater in modem 
times than they used to be. It is a far cry from the meeting of 
two savage tribes armed with bows and arrows or javelins to the 
modern sixteen inch guns, the dreadnoughts, the aeroplanes, the 
submarines, the poison gas, and the innumerable technical adjuncts 
of modern warfare. The consequence is that the money costs of 
the great war have far transcended those of all previous conflicts. 

The attempt to present in figures the cost of the war even in 
this restricted sense meets with several difficulties. In the first 
place, the question arises as to the period when we ought to stop. 
In one sense the war ceased when the armistice was declared: in 
another sense the war did not actually stop until peace was rati- 
fied — in this case a matter of over a year more. But even when 
peace is made, the war expenditures are by no means over. The 
process of demobilization is a slow one; and in many countries 
there have been considerable demobilization bonuses. Moreover, it 



742 Edwin R. A. Seligman [December 

is necessary to continue for some time the policing of the con- 
quered countries. Again, we must take account of the compensa- 
tion to citizens for war damages; of the expenses of reconstruc- 
tion; and of the loss on exchange of the depreciated currencies. 
Finally comes the question of the pensions to the wounded soldiers 
or to the families of the dead. It will be seen, therefore, how im- 
possible it is to state with any accuracy at the present time the 
costs of the war, while these are still being incurred. Furthermore, 
the figures ordinarily given contain many inaccuracies. The richer 
countries make advances to the poorer countries, and these ex- 
penditures are sometimes counted twice in the total — a procedure 
legitimate only on the assumption that the loans will not be repaid. 
Again, in a country like the United States, which has substituted 
an insurance system for pensions, the nominal expenditures appear 
smaller than is really the case, because of the receipt of vast in- 
surance premiums which will ultimately all be expended again. 
Finally, the figures make no allowance for the changes in the 
price level or the alteration in the value of money. In a great war 
like the present, prices always rise; in some countries they have 
doubled, in some they have more than trebled, for reasons which it 
is needless to discuss here. What seems, therefore, to be an in- 
creasing outlay from year to year may be in reality due, in part 
at least, to this cause. 

After making allowance for these difficulties, we may proceed 
to state some of the facts as to the actual outlays of various coun- 
tries. 

The first point of interest is the average daily expenditure for 
war purposes. In all the belligerent countries it naturally took 
some time for them to get into their stride. This is especially true 
of Great Britain. The figures of the average daily expenditures, 
as given by the chancellors of the exchequer, amount to almost 
ten million dollars for the opening months of the war and reached 
the maximum of almost thirty-six millions by 1918. These stu- 
pendous figures, however, are somewhat exaggerated, because no 
distinction is made between expenditures in the war and expendi- 
tures for the war. In order to ascertain the real war expenditures 
in any country, it is obvious that we must deduct the amount of 
ordinary or peace expenditures. This it is not always easy to do. 
In the first place, peace expenditures themselves tend to gi'ow from 
year to year. If, therefore, we take as a criterion the ordinary 
expenditures for the year preceding the war, this sum ought, es- 



1919] The Cost of the War and How It Was Met 



743 



pecially in a long war, to be somewhat increased from year to year. 
In the second place, the expenditures prior to the war may some- 
times include preparations for an impending war and should there- 
fore be reduced accordingly. Since, however, it is impracticable 
to make these detailed corrections in every case, it will suffice to 
deduct from the expenditures of each war year the amount of the 
expenditures in the last year of peace, even though this tends 
slightly to exaggerate the real money cost of the war. Making 
these corrections, it appears from table A that the average daily 
war expenditures in Great Britain grew from 9^/2 million dollars 
during the first eight months of the war to 331/^ miUions m 1918 
and then slowly receded. In France the average daily expendi- 
tures, as was to be expected, were somewhat less, rising from about 
81/^ million dollars during the first three months of war to over 
21 millions during 1917, the last full year of war. In Germany 
the daily expenditures were approximately the same as in Great 
Britain, rising from about 13 million dollars in the first nine 
months of the war to about 341/2 millions during the last half of 
1918, In the case of both Germany and France, however, it is 
not known whether the figures comprise the total expenditures or 
only the purely war expenditures. In the former event, the daUy 
expenditures of Germany would be a little less than those of Great 
Britain ; in the latter, they would be a little more. In Italy and 
Austria, the daily expenditures were naturally smaller, amount- 
ing as a maximum to 10^ and 20 millions respectively. In Rus- 
sia the daily expenditures rose in 1916 to 21 millions, and in 
1917, just prior to the October revolution, nominally to 47 mil- 
lions. Owing to the great depreciation of the ruble, however, the 
actual expenditures were much less. The salient facts are given 
in table A. 

Table A. — Average Daily War Expenditures. 
(In millions) 

Great Britain 





Average daily 


Average daily 




total expenditures 


■war expenditures! 




£ 


^ 


£ 


^ 


Aug. 4, 1914— Mar. 30, 1915 


2.05 


9.98 


1.98 


9.46 


Apr. 1, 1915— " 1916 


4.27 


20.79 


3.73 


18.16 


1916— " 1917 


6.02 


29.33 


5.48 


26.69 


1917— " 1918 


7.39 


35.97 


6.85 


33.36 


1918— Nov. 9, 1918 


7.44 ] 








(Armistice) 


i7.07 


34.43 


6.52 


31.75 


Nov. 10, 1918— Mar. 30, 1919 


6.47 J 









744 



Edtenn R. A. Seligman 

FUAXCE 



[December 





Average 


monthly 


Average daily 




war expenditures 


war expenditures 




fr. 


^ 


$ 


Aug. 3— Dec. 31, 1914 


1,318 


254 


8.5 


Jan. 1— Dec. 31, 1915 


1,900 


367 


12.2 


« — « 1916 


2,743 


529 


17.6 


« _ « 1917 


3,360 


648 


32.4 



Germany 









Average monthly 


Average daily 








war expenditures 


war expenditures 




Mk. 


MA;. $ 


Aug. 1, 


1914— June 30, 


1915 


1,675 


55.8 13.3 


July 1, 


1915— 


1916 


2,008 


66.9 15.9 


" 


1916— 


1917 


2,867 


95.6 22.7 


" 


1917— 


1918 


3,908 


130.3 31. 


" 


1918— Dec. 31, 


1918 


4,358 


145.2 34.5 



Italy 



July 1, 1915— June 30, 1916 

" 1916— " 1917 

1917— " 1918 

1918— Oct. 31, 1918 



Annual expendituress 



li. 

3,351 
14,132 
19,734 

9.726 



1,612 

2,727 
3,808 
1,977 



Average daily 
expenditures 



9 

4.4 

7.5 

10.4 

6.5 





Russia 








Annual war 
expenditures 


Average daily 
war expenditures 


Aug. 1, 1914— Dec. 31, 1914 

Jan. 1, — " 1915 

— " 1916 

—Oct. 30, 1917 


ru. 

1,703 

9,194 

15,372 

25,231 


$ 

877 

4,735 

7,916 

12,993 


$ 

5.8 
12.9 
21.6 
47.0 



AtrSTEIA3 







Annua] 


war 


Average daily 






expenditures 


war 


expenditures 




Kr. 


$ 




9 


July 28, 1914— June 30, 


1915 


10,706 


2,174 




6.4 


July 1, 1915— 


1916 


15,726 


3,192 




8.7 


1916— 


1917 


18,788 


3,812 




10.4 


1917— 


1918 


22,170 


4,500 




12.3 



1 Arrived at by deducting the expenditures for the year 1913-1914 (197 mil- 
lions) from the total expenditures. 

2 Not including payments abroad. 

3 The figures for Hungary are not available; but as the total expenditures of 
Hungary during the four years were about one third of those of Austria, it 
is safe to add that proportion to the Austrian expenditures in order to ascer- 
tain the average daily war expenditures of Austria-Hungary. 



1919] The Cost of the War and How It Was Met 745 

When the United States entered the war, the scale of operations 
became so gigantic that the daily war expenditures soon far ex- 
ceeded those of any other belligerent. In the second month of the 
war the average daily expenditures for war purposes reached 15 
million dollars, and a little over a year later they had risen to al- 
most 50 million. By the end of 1918, as appears from table B, the 
daily average war expenditures attained the staggering sum of 
64^2 million dollars, almost double those of Great Britain and far 
exceeding those of any other belligerent. 

We come next to the total cost of the war. In attempting to 
present the comparative statistics on this point, we must be mind- 
ful of the difficulties adverted to above. The figures are not quite 
accurate and cannot be made entirely accurate for several reasons. 
In the first place, the last date in the official return differs from 
country to country. The dates are, however, all subsequent to 
the armistice, with the exception of Russia, where we have no 
trustworthy figures after the October revolution in 1917. In 
the second place, we do not know, except in the case of the United 
States and Great Britain, whether the figures comprise the total 
expenditures or only the purely war expenditures. Even in the 
case of the United States the official figures are not quite accurate, 
as will be seen below.* Moreover, in the case of Japan as well as 
some of the minor belligerents, no figures are included because the 
war expenditures were either virtually non-existent or of an ex- 
ceedingly insignificant amount. 

Making allowance for these points, it will be seen from table C 
that the total war expenditures amount to about 232 billion dol- 
lars. From this sum, however, must be deducted the amounts 
counted twice, because advanced to their allies by the United 
States, Great Britain, France, and Germany, aggregating a little 
over 21 billions. This would bring the actual net war expenses to 
over 210 billion dollars.^ Inasmuch, however, as most of the 
countries will continue, for some little time in the future, to have 
expenditures attributable to the war, it is probable that the total 
war expenditures will, by the end of 1920, amount to over 236 
billions, or, deducting the advances to allies, to a little less than 

i Infra, p. 753, note to table H. 

5 For France we have taken the total five-year expenditures as stated by 
Minister Klotz in 1919 (192 billion francs) and have deducted 23 billions, as 
representing the peace expenditures for the four and a half year period, thus 
leaving a remainder of 1G9 billion francs or 311/3 billion dollars. 



746 



Edwin R. A. Seltgman 



[December 



Table B. — Exi'ExnrrrnEs of the United States. 
(In millions) 





Monthly expendi- 








tures exclusive of 


Monthly 


Average 


Period 


the principal of 


war 


daily war 




the public debt 
and of postal 


expenditures' 


expenditures 




expenditures 






1917: Apr. G-30 


$279 


$219 • 


.$8.0 


May 


527 


467 


15.0 


June 


410 


350 


11.7 


Total, Apr. 6-June 30 


$1,216 


$1,156 




July 


QG2 


602 


19.4 


August 


757 


697 


22.5 


September 


746 


686 


22.9 


October 


944 


884 


29.5 


November 


986 


926 


30.9 


December 


1,105 


1,045 


33.7 


1918: January 


1,090 


1,030 


33.2 


February 


1,012 


952 


34.0 


March 


1,156 


1,096 


35.9 


April 


1,215 


1,155 


38.5 


May 


1,508 


1,448 


46.7 


June 


1,512 


1,452 


48.4 


Total, fiscal year 1918 


$12,697 


$11,977 




1918: July 


1,608 


1,548 


49.9 


August 


1,805 


1,745 


56.8 


September 


1,557 


1,497 


49.9 


October 


1,665 


1,605 


51.8 


November 


1,935 


1,875 


62.5 


December 


2,061 


2,001 


64.5 


1919: January 


1,962 


1,902 


61.4 


February 


1,189 


1,129 


40.0 


March 


1,379 


1,319 


42.5 


April 


1,429 


1,369 


45.6 


May 


1,112 


1,052 


33.9 


June 


809 


749 


24.9 


Total, fiscal year 1919 


$18,505 


$17,785 




Total, Apr. 6, 1917- 






June 30, 1919 


$32,428 


$30,918 





1 Obtained by deducting one twelfth of the annual (peace) expenditures for 
1915-1916 exclusive of postal expenditures: i.e., one twelfth of $1,008—287 mil- 
lions = 60 millions. Secretary Glass in his Letter of Juhj 9, 1919, to the 
Chairman on the Committee on TFay.f and Means excludes postal expenditures 
in the first column, but fails to exclude them when making the deduction for 
peace expenditures. He consequently arrives at the figure of $30,177 millions 
as the cost of the war. The total of $30,918 millions given above does not, 
however, represent accurately the war expenditures, as the figures are based 
on the provisional daily treasury statements used by Secretary Glass. The 
correct total, arrived at in another way, will be found in table H below. But 
the above figui*es are the only ones available for calculating the monthly and 
daily expenditures. 



1919] The Cost of the War and How It Was Met 747 

215 billions. This may be accepted as a fairly accurate state- 
ment of the real money cost of the war." 

Table C. — Total War Expenditures 
(In millions) 

Great Britain Aug. 4, 1914 -Mar. 31, 1919 £8,601 $41,887 

Australia " " " . " " " 291 i,46l 

New Zealand " " " - « " " 7« 365 

Canada " " " - Aug. " " 1,545 

South Africa " " " - Mar. " " 33 243 

India " " " - " " « 119 584 



British Empire 

France Aug. 3, 1914 -Mar. 31, 1919 fr. 

Russia Aug. 1, 1914 -Oct. 31, 1917 ru. 

Italy May 23, 1915 - May " 1919 11. 

Belgium Aug. 2, 1914 -Oct. " 1918 fr. 

Rumania " 27, 1916 - " " 

Serbia July 28, 1914 - " " 

United States .... April 5, 1917 -June 30, 1919 

Entente Powers 156,050 

Germany Aug. 1, 1914 - Oct. 31, 1919 mk. 204,268 48,616^ 

Austria-Hungary.. July 28, " -July " " kr. 119,504 24,858=* 

Turkey Nov. 3, " - Oct. " 1918 1,802 

Bulgaria Oct. 4, 1915- " " " 732 





$46,085 


169,000 


32,617 


51,500 


26,522 


81,016 


15,636^ 


5,900 


1,387 




907 




635 




32,261 



Central Powers 76,008 



Total $232,058 

Loans to Allies 

Great Britain £1,739 $8,467 

France fr. 6,700 1,293 

Germany mk. 9,500 2,261 

United States 9,102 



Total 21,123 



Total net war expenditures $210,935 

iThe total expenditures were li. 91,016 millions. Deducting 10,000 millions 
for four years of peace expenditures leaves 81,016. 

2 Obtained by adding to the war debt as found in table R approximately 
5 billion marks of war expenditures paid out of revenue. 

3 Obtained by using the figures of war debt as found in table R. 

II 

The question now arises as to the steps taken by the various 
countries to meet these stupendous outlays. Of the older expedi- 
ents, such as war treasures or the sale of public property, there 
was naturally no question. In Germany alone was there a war 

6 These figures are considerably larger than those given by Ayres and other 
writers. But none of these authors uses the latest, and much augmented, 
oflScial figures for France, Italy, and especially Germany. 



748 Edwin R. A. Selignwn [December 

treasure. But, as even this was so small as to be well nigh negligi- 
ble, it follows that the only two available resources were taxation 
and borrowing. 

When we compare these two expedients we are struck not only 
by the great difference in the theories of war finance followed by 
the various countries, but also by the diversity in the economic 
conditions which largely influenced the choice. In general, it may 
be said that all countries were compelled to rply to an overwhelm- 
ing extent on public loans, but that Great Britain and the United 
States raised a greater share by taxation than did other coun- 
tries. Italy, for instance, was able to secure by new taxation 
only just about enough to pay the interest on the war loans; 
Germany accomplished this only in part ; while France was not 
in a position to defray any of her war expenses from taxation. 
The same is true of the other belligerents, Avith the exception of 
some of the British colonies. 

Proceeding to consider this matter in detail, we shall first at- 
tempt to set forth the facts as to war taxation. 

Great Britain, as the wealthiest of the belligerents, adopted at 
the outbreak of war the praiseworthy method of endeavoring to 
raise as much as possible from taxation. From year to year, as 
the expenses mounted up, continually more demands were made 
upon the taxpayer. The war expenditures were, however, so 
prodigious that it soon turned out to be impracticable to obtain 
more than a comparatively small proportion of the total outlay 
from taxation. The figures ordinarily advanced to illustrate this 
point do not, however, give a true picture of the situation. The 
statements made by the various chancellors of the exchequer, and 
repeated by all commentators, are based on the proportion that 
total taxes bear to total expenditures. This method of calcula- 
tion, as will be seen from table D, shov/s that almost a quarter of 
the total expenditures or, to be more exact, 24.9 per cent, was 
derived from taxes. These figures, however, involve a double error. 
In the first place, the really significant problem is to ascertain the 
war expenditures, not simply the total expenditures. War ex- 
penditures can best be obtained, as we have seen, by deducting 
from the total annual expenditures the expenditures for the last 
full year of peace. In the second place, what is significant is not 
the total yield of all taxes, but the proceeds of war taxes, that is, 
the proceeds of the additional taxes raised during the war. These 
again can be obtained by deducting from the total tax revenue the 



1919] 



Tlie Cost of the War and How It Was Met 



749 



yield of the taxes during the last full year of peace. If then we 
endeavor to ascertain how much of the war expenditures were met 
by war taxes — and this is really the important problem — we find 
that, immense as were the burdens resting upon the British tax- 
payer, the percentage of war expenditures raised by war taxes was 
much smaller than is usually stated. As a matter of fact, as ap- 
pears from table D, in the first year of war only a little over 7 
per cent of the total war expenditures were raised from war taxes. 
With every succeeding year, indeed, the percentage increased until 
in the last year of war, 1918-1919, slightly over one quarter of the 
war expenditures were met from war taxes. For the entire five 
years, however, the proportion of war taxes to war expenditures 
was about 17 per cent. In other words, only a little more than 
one sixth of the war expenditures in Great Britain was derived 
from war taxes. Even if we exclude from the war expenditures the 
sums advanced to the Allies — and the Chancellor of the Exchequer, 



Table D.- 



-War Expenditures of Great Britain. 
(In millions sterling) 





Year ending March 30 


Total for 

the five 

years 

1915-1919 




1915 


1916 


1917 


1918 


1919 


Total expenditures 

War expenditure^! 

Loans to Allies and Do- 
minions 

Revenues other than loans 
Tax revenues 


£ 

560 

357 

Q21 
189 
26 

P.c. 

40.5 
33.7 

7.3 


£ 
1,559 
1,363 

337 
290 
127 

P.c. 

21.6 
18.6 

9.3 


£ 

2,198 
2,001 

573 
514 
351 

P.c. 

25.1 

22.4 

17.5 


£ 
2,696 
2,499 

707 
613 
450 

P.c. 

26.2 
22.7 

18.0 


£ 
2,579 

2,382 

889 
784 
621 

P.c. 

34.1 
30.4 

26.0 


£ 
9,592 

8,601 

1,739 
2,733 
2,390 
1,475 

P.c. 

28.1 
24.9 

17.1 


War tax revenuess 

Proportion of total ex- 
penditures from non- 
loan revenues 

Proportion of total ex- 
penditures from taxes 

Proportion of war ex- 
penditures from war 


Proportion of net war 
expenditures (less 
loans to Allies and 

. Dominions) from war 
taxes 


21.2 



1 Obtained by deducting from the total expenditures each year the peace ex- 
penditures for 1914, amounting to 197 millions. 

2 Obtained by deducting from the tax revenues the 1914 tax revenue, amount- 
ing to 163 millions. 



750 



Edwin R. A. Seligmn-n 



[December 



Mr. Chamberlain, thinks it safe to allow for only half of this 
amount — the proportion would be a little over 21 per cent or 
slightly more than one fifth. These figures are much less than is 
ordinarily stated. But even this proportion of revenue derived 
from taxation Avas sufficient to maintain the credit of Great 
Britain. 

In the other belligerent countries, the showing was by no means 
so good. France struggled under a double difficulty. In the first 
place, France was invaded at the outset of the war ; and the terri- 
tory occupied, although relatively small in extent, represented the 
richest and the most industrially developed part of the country. 
This operated largely to reduce the ordinary revenue. In the 
second place, the resultant economic confusion, as well as the gen- 
eral political situation, rendered it difficult to impose any new 
taxes at all. The consequence, as will be seen from table E, was 
that for the first three years of the war the tax revenues of France 
were actually smaller than before the war and that as a result they 
did not suffice even to defray the ordinary peace expenditures, not 
to speak of making any contribution to war expenditures. 

Table E. — Revenues of France. 
(In million francs) 





1913 


1914 


1915 


1916 


1917 


1918 


Direct taxes 

Tax on war profits 

Tax on intangibles 

Stamps 


634 

138 

1,086 

903 

754 

1,035 

539 

5,089 


496 

153 
117 
745 
577 

'931 

290 
3,983 


437 

'158 
612 
714 
764 

'844 

370 

8,801 


893 

'isi 

683 

520 

1,556 

943 

240 
4,818 


1,017 
193 
242 
895 
693 

1,785 

i',io8 

354 
6,306 


727 
714 
252 
1,143 
734 


Import duties 

Tax on sales 


1,814 

210 

1,154 


Miscellaneous 

Total 


285 
6,533 



After a while, indeed, France found it possible to levy some war 
taxes ; but, as appears from table E, these were exceedingly slight 
compared with what had been accomplished in Great Britain. The 
consequence is that the new war taxes of France were only just 
about sufficient to make up the deficit in the ordinary peace bud- 
get — a deficit caused chiefly by the devastation of the occupied 
territory. In France, therefore, we may conclude that no part of 
the war expenditures was met by war taxes. A share of the re- 
sponsibility for this fact must, however, be laid at the doors of the 



1919] The Cost of the War and How It Was Met 751 

government, which disclosed an unwarrantable timidity in levying 
taxes. The natural results of the adoption of the loan policy in 
the fiscal conduct of the war are seen in the exaggerated rise of 
prices, the depreciation of the franc, and the serious condition of 
finances in France today. 

In Italy the situation was a little better. Italy had not been 
invaded, and its financial situation was not so desperate as that 
of France. Moreover, Italy entered the war somewhat later and 
was not compelled to endure the strain for so long a time. Italy 
consequently proceeded as soon as possible to levy new war taxes ; 
but, as she had always been relatively overtaxed as compared with 
Great Britain, it was not feasible to do as much. As a result, the 
war taxes levied by Italy were just about sufficient to pay the in- 
terest on the war loans. While Italy, therefore, did better than 
France, she also was not able to defray any of the war expendi- 
tures proper out of war taxation. 

The condition of Russia soon became worse than that of France 
and Italy ; and even before the October revolution in 1917 Russia 
was able to put very little reliance upon revenue from war taxa- 
tion. 

Among the Central Powers the situation was much the same, but 
for a different reason. Germany at the outset of the war, had so 
confidently counted upon victory, with resultant huge indemnities, 
that it resolved to follow the loan policy, at all events so far as 
the imperial government was concerned. For it must be remem- 
bered, that in Germany a not insignificant part of the war ex- 
penses was met by the separate states ; and in the states a con- 
siderable increase of taxation was provided for at once. As the 
war proceeded, however, and the hopes of a speedy and complete 
victory gradually faded away, Germany began to change her policy 
and now decided, especially from 1916 on, to impose more and 
more taxes. The result was that by the end of the war, Germany 
had done a little better than France although a little less well 
than Italy. The figures for the chief continental belligerents are 
given in table F. 

If the latest figures as represented by Minister Erzberger are 
used, the showing is not appreciably more favorable. According 
to these figures, of the total war expenditures to October, 1919, 
of about 204 billion marks, about 5 billions were derived from other 
sources than loans. 

We come, finally, to the experience of the United States. When 



752 Edwin R. A. Seligman [December 

Table F. — Revenues and Loans: Fr.\nce, Italy, Germany. 
(In millions) 
Fuance 
Expenditures Income 

fr. fr. 

Aug. 1, 191 1-M<ar. 31, 1919 174,500 Loans 159,400 

Advances to Allies 6,700 Other revenues . . 22,500 



181,200 181,900 

Foreign debts and other minor items.. 11,000 

Total 192,200 

Annual revenues before the war 5,000 

Total peace revenues during the war jjcriod 34,000 

Hence the total non-loan revenues during the war did not quite equal the 
peace revenues calculated on the pre-war basis. 

Italy 

Expenditures Income 

li. U. 

May, 1915-June 30, 1918 87,516 Loans 64,132 

Still due 3,500 Other revenues . . 26,034 



Total 91,016 Total 90,166 

Annual peace revenues 2,687 

Total peace revenues during the war period 13,435 

Deducting 13,435 from 26,034 leaves as war revenue 12,599 

Hence the war revenues barely sufficed to pay the interest on the war loans. 

Gekmany 
Expenditures Income 

mk. mk. 

Aug. 1, 1914-Dec. 31, 1918 170,300 Loans 153,000 

Other revenues . . 17,000 



Total 170,000 

Annual peace revenues (1913) 3,200 

Total peace revenues for 41/0 years of war 14,400 

Deducting 14,400 from 17,000* leaves as war revenue 2,600 

the United States entered the war, it was confronted by the two 
rival theories of pubHc finance. One was to the effect that the 
war expenses should be defrayed entirely by loans, as had been 
the case in the early years of the Civil War and which was true, as 
we have just seen, of many of the belligerents during this war. 
The other theory, advanced especially in the famous iNIinnesota 
memorandum, was that the war expenditures ought to be defrayed 
entirely out of war taxes. This theory was equally as extreme 
and as perilous as the loan policy and labored under the addi- 
tional disadvantage of being impossible of achievement. The 
President went so far as to proclaim the fifty-fifty per cent theory, 
namely that one half of the war expenditures ought to be defrayed 
from war taxation. But even this turned out, as was to have been 



1919] The Cost of the War and How It Was Met 753 

expected and as was pointed out by the present writer among 
others, to be far more than was possible. 

The prodigious profits made during tlie opening years of the 
European war and the resulting prosperity throughout the coun- 
try enabled Congress to levy taxes far higher than had ever be- 
fore been attempted in our history. Even with an immense addi- 
tion to taxation, however, the proportion derived from war taxes 
was relatively small, and in fact considerably smaller than is ordi- 
narily stated. Here, again, we must observe the same caution as 
in the case of the British figures. We must not compare the total 
expenditures of the war period with the total taxes of the war 
period, but war expenditures with war taxes — which is something 
very different. In tables G and H an attempt is made, on the basis 
of certain official figures, to arrive at correct results. The ex- 
planation of the methods of calculation is found in the notes ap- 
pended to the tables ; and the reasons for the difference between 
the results here given and the statements of the secretaries of the 
treasury are presented in the general note below. ^ 

7 The figures contained in tables G and H, unless otherwise stated or calcu- 
lated from preceding figures, are taken from the annual Report of the Secre- 
tary of the Treasury on the Finances for the year 1918. For 1919 where the 
annual report is not yet available we have taken the figures as presented by 
Secretary Glass in his Letter of July 9, 1919 to the Chairman of the Commit- 
tee of Ways and Means. The figures for postal revenues and expenditures are 
the estimates of the department. 

The figures as presented in the tables, do not, however, always agree with the 
official statements. In the first place it is difficult to know what are the offi- 
cial figures, as they frequently differ among themselves. For instance, the 
figure? found in the tables of the Annual Report for 1918, pages 480 et seq. 
(hereinafter called A), do not tally with those in the text of Secretary Mc- 
Adoo's conuTients in the Annual Report, pages 3-5 (hereinafter called B), nor 
with the figures of Secretary Glass in his Letter of July 9 (hereinafter called 
C). In some cases the discrepancies are serious. 

Thus in A the receipts for 1917 are given (including postal receipts of 
330 millions) as 3,845 millions; in B, as 3,553 (excluding postal). For 1918 
again, the receipts are given in A as 21,490 millions (including postal receipts 
of 344 millions); in B, as 21,155 millions (excluding postal). In A the dis- 
bursements for 1917 are given as 3,046 millions (including postal disburse- 
ments of 330 millions) ; in B, as 2,704 (excluding postal). For 1918 the re- 
spective discrepancies are: A, 21,813; B, 20,903. Even in minor details there 
are no agreements. Thus public debt receipts are given for 1917 in A as 
2,391 millions; in B, as 2,428 millions. For 1918 the figures are respectively: 
A, 16,965; B, 16,975. Public debt disbursements are given for 1917 in A as 
637; in B, as 678 millions. For 1918 tliey are given in A as 7,685; in B, as 
7,707 millions. If there is any significance in the fact that A gives tables of 



754! Edwin R. A. Seligma-n [December 

As a result of the calculations found in tables G and H it ap- 
pears that during the first quarter year of war, ending June 
30, 1917, the proportion of war expenditures derived from war 

"Receipts and Disbursements" while B gives tables of "Receipts and Ex- 
penditures," it is not apparent from tlie report itself. 

The discrepancies between A and C are more glaring. But as Secretary 
Glass is able to present only preliminary figures for the respective periods, 
on the basis of the daily treasury statements, these discrepancies may be over- 
looked. 

In the second place, considerable confusion results from the absurd system 
still followed in the United States, whereby postal revenues and expenditures 
go through the post office accounts and only the surplus or deficiency passes 
through the treasury accounts. Several years ago the present writer succeeded 
in inducing the Treasury Department to bring about a change to this extent 
that the annual treasury statements are now made up in both ways, viz., as 
revenues and expenditures inclusive and exclusive of postal revenues and ex- 
penditures respectively. Yet these differences are often overlooked. For in- 
stance, when Secretary Glass discusses in his Letter of July 9, 1919, the cost 
of the war, he employs the daily treasury statements which do not include the 
postal figures. As a consequence, his statement of total revenues and expendi- 
tures are quite different from those of Secretary McAdoo in the latter's dis- 
cussion of the cost of the war. 

In the third place, neither Secretary McAdoo nor Secretary Glass, in cal- 
culating the proportion borne by loans and taxes in meeting the war ex- 
penses, attempts to ascertain the really significant fact — viz., the proportion 
of war expenditures met from war taxes. None of the official figures are of 
any help here. 

The present writer has therefore been compelled to make his own calcula- 
tions. Whenever possible, the figures have been taken from the statements in 
the detailed tables published in the Annual Report of the Secretary of the 
Treasury. The combinations, however, as found in this article are not pre- 
sented anywhere in the official statements. 

Some of the results reached in this article which differ materially from the 
official statements, are as follows: 

The total cost of the war to June 30, 1919, is given by Secretary Glass as 
$30,117 millions, whereas the more accurate computation results in a total 
cost of $32,361 millions. Secretary Glass's figures involve a double error. In 
the first place, they are based on the preliminary daily treasury statements 
which are confessedly not final ; and, as explained in the note to table B 
(p. 746 supra), he fails to allow for postal expenditures. Again, Secretary 
McAdoo states that in 1917 55 per cent of the expenditures were paid from 
revenue receipts, and in 1918 31.6 per cent; whereas the correct figures are 
60.4 jier cent and 33.8 per cent respectively, and the really significant figures 
(the proportion of war expenditures from war taxes) are 30 and 24.8 per 
cent respectively. In the same way, Secretary Glass states that 29 per cent of 
the expenditures for the war period were met from tax receipts and other 
revenue, whereas the correct figures are 33.2 per cent, and the really signifi- 
cant figure is 23.3 per cent. 



1919] The Cost of the War and How It Was Met 755 

taxes was less than one third or, more exactly, 30 per cent. If 
we exclude from the expenditures the loans to the Allies, on the 
assumption that they will all be repaid some day, the showing in 
the first three months is, of course, much better, as two thirds of 
the expenditures of that period consisted of such loans. How- 
ever, as soon as we struck our full gait, the situation was far less 
satisfactory. During the year 1917-1918 the proportion of war 
expenditures derived from war taxes was less than a quarter or, 
more exactly, only 24.8 per cent; and even if we again exclude 
loans to Allies, which now constituted about one third of the whole, 
only 30 per cent of the expenditures were derived from war taxes. 
In the final year of the war the showing was still less favorable, 
the figures being respectively 21.7 per cent and 27 per cent, i.e., a 
little over one fifth or one fourth respectively. For the entire 
period of our participation in the war it appears that less than 
one fourth (or exactly 23.3 per cent) of the war expenditures 
were paid out of war taxes. And if the loans to Allies are again 
excluded, the proportion is still under one third or, more exactly, 
32.5 per cent. 

These figures disclose two significant facts. In the first place, 
the relative revenue derived from war taxes became smaller, in- 
stead of larger, as the war proceeded. This unusual and unex- 
pected result is, of course, due to the stupendous growth of war 
expenditures which rapidly overtook even the largely increased 
revenues from war taxes. It was impossible, even by stretching 
the tax revenues to the utmost, to begin to keep pace with the 
huge growth in the war outlays. In the second place, we are 
struck by the great disparity between the actual facts and the 
fifty-fifty per cent program originally suggested by Secretary 
McAdoo and adopted in the recommendation of President Wilson 
— not to speak of the 100 per cent program of the Minnesota 
memorialists. 

Ill 

The next point of interest is the character of the war taxes im- 
posed by the various countries. Here again we notice great vari- 
ations. Although the policy of taking a substantial share of war 
profits by taxation was almost everywhere adopted as a matter of 
principle, it was applied very differently in various countries. As 
a matter of fact, in almost all of the continental countries, about 
as much additional revenue was raised from indirect as from direct 



756 



Edwin R. A. Seligma-n 



[Decemher 



Table G. — Receipts and Disbursements of the United States, 1915-1919. 
(In millions) 





Year ending June 30 


Receipts 


1915 


1916 


1917 


1918 


1919 


Customs 


$211 


$213 


$226 


$183 


$184^ 


Internal revenue 


416 


513 


809 


3,696 


4,316^ 


Miscellaneous 


71 
698 


52 

780 


81 
1,119 


293 
4,174 


646' 


Total ordinary receijits 


5,152' 


Panama canal 






6 


6 


6' 


Excess of deposits to re- 












tire national banknotes 


4 


32 




.... 





Postal receipts 


287 


312 


330 


344 


354* 


Total (exclusive of prin- 












cipal of public debt)^ 


989 


1,126 


1,455 


4,795 


5,506 


Public debt receipts . . . 


1 


2 


2,391 


16,695 


29,300'* 


Total 


990 


1,128 


3,845 


21,490 


34,806" 














Disbursements 












Ordinary (exclusive of 












postal) 


$725 


$719 


$2,067 


$13,769' 


$18,515"' 


Including loans to Allies 






(885)^ 


(4,738)^ 


(3,479)' 


Panama 


29 


18 


19 


21 




Postal 


294 


312 


320 


327 


354" 


Excess of national bank- 












notes retired over de- 












posits 


.... 




3 


11 




Total (exclusive of prin- 












cipal of public debt) 


1,048» 


1,048' 


2,409» 


14,127' 


18,869" 


Public debt disburse- 












ments 


0.05 


0.04 


637 


7,686 


15,860" 


Total 


$1,048 


$1,048 


$3,046 


$21,813 


$34,729" 







1 From the Letter of Secretary Glass to the Chairman of the Committee of 
Ways and Means, July 9, 1919. 

2 Obtained by deducting from the "total of all receipts" in the Report of 
the Secretary of the Treasury, 1918, p. 484, the "total public debt receipts," 
ibid. 

3 Includes the 6 millions Panama receipts. 

4 Estimated, by the Secretary of the Treasury {Annual Report, 1918, p. 145). 

5 Obtained by deducting from the "public debt receipts, Apr. 6, 1917-June 
30, 1919," as given by Secretary Glass in his Letter of July 9, 1919 (48,386 
millions) the public debt receipts as stated in table above for 1917 and 1918. 

6 Obtained by adding the various items specified. 

7 As stated by Secretary Glass in his Letter of July 9, 1919, p. 4. 

8 Obtained by deducting from total the public debt iiisbursements. 

9 As stated in the Annual Report on the Finances. Secretary Glass {op. 
cit., p. 4) gives total disbursements other than principal of public debt as 
12,697 millions. 

10 As stated by Secretary Glass, op. cit., p. 4. 

11 As estimated by Secretary McAdoo in the Annual Report for 1918. 

12 Obtained by adding the two items above. 

13 Obtained by deducting from the public debt disbursements, Apr. 5, 1917- 
June 30, 1919, as stated by Secretary Glass, op. cit. ($24,183) the public debt 
disbursements for 1917 and 1918, as given above in the table. 

11 Obtained by adding the two items above. 



1919] 



The Cost of the War and How It Was Met 



757 



Table H. — Receipts and Expenditures of the United States, April 5, 1917- 

JuNE 30, 1919. 

(In millions) 





1917 


1918 


1919 


Total for 

period Apr. 5, 

1917-June 30, 

1919 


Total disbursements^ 

Total expenditures, exclusive of 

principal of the public debt^ 

War expenditures^ 


$3,046 

2,409 
1,361 


$21,813 

14,127 
13,079 


$34,729 

18,869 
17,821 


$59,588' 

35,405* 
33,261 


Loans to Allies^ 

War expenditures exclusive of 


885 

476 
1,455 
1,035 

409 

P.c. 
60.4 
42.9 
30. 

85.7 


4,738 

8,341 
4,795 
3,879 
3,253 

P.c. 

33.8 

27.4 

24.8 

39. 


3,479 

14,342 
5,506 
4,500 
3,874 

P.c. 
29.1 

23.8 
21.7 

27. 


9,102 
23,159 


Revenue exclusive of public debt^ 
Tax revenues^ 


11,756 
9,414 




7,536 


Proportion of total expenditures 
from non-loan revenues 

Proportion of total expenditures 
from taxes 

Proportion of war expenditures 
from war taxes 

Proportion of war expenditures 
exclusive of loans to Allies 
from war taxes 


P.c. 
33.2 
26.5 
23.3 

32.5 



1 From table G. 

2 Obtained by deducting from total expenditures the (peace) expenditures 
of 1915 ($1,048). 

3 Obtained by adding the customs and the internal revenue. 

4 Obtained by deducting from the tax revenues the tax revenues for 1915 
(626 millions). 

5 Total for the three fiscal years 1917, 1918, 1919. 

taxation. Indeed, in France considerably more revenue was de- 
signed to be raised from indirect taxes, including taxes on con- 
sumption, than from direct taxation or taxes on wealth. The re- 
spective figures, as appears from table I, are about 60 per cent 
for indirect and 40 per cent for direct taxes. In actual result, 
the increase due to indirect taxation was not so great as had 
been expected, due partly to the fact that the war profits tax 
yielded much more than had been anticipated (907 million 
francs instead of 540 millions), but above all because the tax on 
sales produced in the first year far less than had been hoped for 
(210 instead of 800 million francs). As a consequence, the pro- 
portions derived from direct and indirect taxes Avere actually just 
the reverse of those mentioned above, namely about 60 per 
cent from direct and about 40 per cent from indirect taxes. 



758 



Edmn R, A. Seligma'n 



[December 



Table I. 



-Revenue Expected from Increased Taxes in France, 1914-1918, 
(In million francs) 



Direct 



War profits tax 540 

Military war tax 12.5 

Income tax 250 

"Assimilated taxes" . . 24. 

Inheritance tax 148 

Intangibles 38 

Land tax 30 



1,042.5 



Additions of Jime, 1918: 
Income tax | 
Inheritance tax j ' ' ' 



56 



1,098.5 
or 39.3 per cent 



Indirect 



Alcoholic drinks 

Non-alcoholic drinks. 
Druggists specialties. 

Sugar 

Colonial products .... 

Tobacco 

Postage ^ . . 

Theatres 

Sales 



75 
85 
12 
90 
70 
80 
58.5 
10 
800 



1,280.5 
Additions of June, 1918: 

Stamp taxes 76 

Other indirect taxes 333 



1,689.5 
or 60.7 per cent 




In Italy, where the new war taxes were imposed at once in 1915, 
it was expected that the war profits tax (at the rate of from 8 to 
20 per cent) would yield about 55 million lire, and the augmented 
taxes on incomes and business about 220 millions, or a total of 275 
millions from direct taxes compared with an estimated revenue of 
110 millions from various increases in indirect taxes. 

In 1916, however, while the rate of the war profits tax was in- 
creased so as to vary from 20 to 60 per cent and that of the in- 
come tax to about 16 per cent, the stamp taxes were raised and 
the number of state monopolies was increased. The same policy 
was followed during the next year so that by the end of the war, 
in addition to the old government monopolies on tobacco, salt, 
matches, lotteries, and cards, we now find monopolies on coffee, 
paraffine, and mineral oils, quinine, and various minor objects. 
The result was that in 1918 just about as much additional revenue 
was derived from the new indirect taxes as from the new direct 
taxes. The exact figures are as follows : the direct taxes, techni- 
cally so called, yielded 1500 million lire and the business taxes 560 
millions, or a total of 2,060 milhons. On the other hand, the in- 
creased revenue from monopolies amounted to 1,060 millions and 
that from the new consumption taxes 950 millions, or a total of 
2,010 millions. In Italy, therefore, the balance was kept just 
about even between the two great categories of taxation. 

In Germany when the government finally decided to resort to 
taxation in 1915, no effort was made to impose any new taxes on 



1919] The Cost of the War and How It Was Met 759 

incomes or inheritances. For the feeling was still very strong 
that income and property taxes ought to be left to the separate 
states, which had in the meantime considerably increased their 
revenue from such sources. A federal tax on war profits was, 
however, imposed. On the other hand, the tax on tobacco was 
largely increased, a high tax was levied on bills of lading, and a 
considerable augmentation was made in postal, telegraph, and 
telephone rates. From all these sources an additional revenue of 
about 500 million marks was expected. When the bill passed 
through the Reichstag, a tax on sales was added, estimated to 
yield about 130 millions. In the next year, 1917, the war profits 
tax was considerably increased, so as to produce about 400 mil- 
lion marks additional; but, on the other hand, a high tax on coal 
was now imposed, designed to yield 500 million marks and pro- 
vision was made for a tax 'on railroad transportation to yield 
310 millions. Finally, in 1918, the government recognized the 
necessity for very much greater revenues from taxation and a 
law provided for additional receipts estimated at 3 billions of 
marks, on the one hand, from an increased tax on Avar profits 
and, on the other, from taxes on sales, luxuries, and higher rates 
on drinks and postal communication. The exact figures as to the 
proportion between the two categories of taxation are not yet 
available; but it is quite safe to say that in the federal govern- 
ment, at leasi, the revenue from indirect taxes considerably ex- 
ceeded that from direct taxes. In the separate commonwealths 
the situation was the reverse, without, however, materially chang- 
ing the general result. 

In contrast to all the continental countries, England pursued 
from the outset a different path. It is true that a considerable in- 
crease of revenue was derived from indirect taxes like customs and 
excises. From 1914 to 1919, for instance, the customs revenues 
were actually trebled and the yield of the excise taxes increased 
about 50 per cent. But the chief reliance for meeting the war 
expenditures was placed on a new war profits tax and an aug- 
mented income tax. The rate of the war profits tax was raised 
gradually from 50 to 60, and finally to 80 per cent; and the in- 
come tax rates were progressively increased until from a quarter 
to a third of very moderate incomes and over a half of larger in- 
comes were taken for the state. In the last year of the war, as ap- 
pears from table K, over three quarters of the tax revenue was 
derived from direct taxes on wealth. This is a great contrast 
to the fiscal history of previous wars. 



760 



Edwin R. A. Seligman 



[December 



Table K. — Sources of Revenue in Great Britain, 1914-1919. 
(In millions) 





Year ending March 30 




1914 


1915 


1916 


1917 1 1918 


1919 


Customs 


35 

40 
27 
10 

.7 

3 
47 

.7 


P.c. 

17.8 

20 

13.8 

5 

0.4 

1 
23.8 

0.4 


£ 
39 
42 

28 

6 

.7 

2 

69 

.4 


P.c. 
6.9 

7.5 
5 

1.3 
0.1 
0.3 
12.4 

0.1 


£ 

60 

61 

31 
7 
.7 
2 
128 
.1 
.4 


P.c. 
4 

4 

2 

0.4 

0.04 

0.1 

9 

0.01 

0.03 


£ 
71 
56 
31 
8 
.6 
2 
205 
140 
.5 


P.c. 
3 

2.2 
1.4 
0.3 


£ 
71 
39 
32 

8 


P.c. 
3.3 
1.4 
1.2 

0.3 

0.04 

0.09 

8.9 

7.3 

0.03 


£ 
103 
59 
30 
13 
.6 
2 
291 
285 
.7 


P.c. 

4 


Excise 


2,2 


Estate duties 


1.1 
0.5 


Land tax 

House duty 

Income tax 

Excess profits tax. 
Land values tax.. 


0.03 

0.09 

9 

6 

0.03 


.7 

2 
240 
220 


0.0 
0.7 

11.2 

11 
0.0 


Total tax reve- 


163 


82.2 


189 


33.6 


290 


19.17 


514 


22. 27 


613 


22.5G 


784 


30 7 






Postal, Telg., Tel.. 

Crown lands 

Suez Canal shares. 
Miscellaneous 


31 
.5 

2 


15.5 
0.3 

1 
1 


30 
.5 

1 
6 


5.3 
0.1 
0.3 
1 


34 
.5 

2 
10 


3.1 

0.03 

1 

0.7 


34 

.6 

8 
17 


1.4 
0.03 
0.2 
0.5 


35 

.7 
6 
52 


1.4 

0.04 
0.3 


40 

.8 
12 
52 


1.6 
0.0 
0.4 

2 


Non-tax revenues 


35 


17.8 


37 


6.8 


47 


3.83 


59 


2.13 


94 


3.74 


105 


4.0 


Total tax and non- 
tax revenues 


198 
3 

202 

197 
24 


100 


237 
407 


40.4 
59.6 


337 
1,165 


23 

77 


573 
1,626 


24.4 
75.6 


707 
1,983 


26.3 
73.7 


889 
1,683 


34.8 
65 2 






Total revenues . . 
Total expendi- 
tures 

Interest on debt. 


633 

560 
23 


100 


1,501 

1,559 
60 


100 


2,199 

2,198 
127 


100 


2,691 

3,696 
190 


100 


2,571 

3,579 
270 


100 



In the United States, also, we find the democratic movement so 
strong that the overwhelming proportion of the new tax revenue 
was derived from direct taxation on wealth rather than from in- 
direct taxes on consumption or transactions. Although the ex- 
cess profits tax was not at first levied at rates as high as in Great 
Britain, the remarkable prosperity of the country resulted in large 
revenues from this source. And while the income tax did not 
reach in the lower stages so high a level as the British, the rates 
in the upper schedules were made considerably higher, finally at- 
taining the unheard of figures of 77 per cent. As a result of the 
revenue act of 1917 over 79 per cent of the tax revenue came from 
direct taxation, principally the income tax and the excess profits 
tax. As a consequence of the second great revenue act of 1918, 
the proportions were still more favorable, the amount ascribable 
to direct taxation in 1919 being, as appears from table L, in re- 
ality almost 81 per cent although the introduction of the system 
of pa3^ment by instalments somewhat obscures this result. 



1919] The Cost of the War and How It Was Met 



761 



Table L. — Internal Revenue 


Receipts of thi 
(In millions) 


United States, 1918, 1919. 




Year ending June 30 




1918 


1919 


Income and profits taxes. 

Munition manufacturers 

tax 


$3,839 

13 

47 

25 


2,924 or 

.$771 or 
3,695 


79.1 per 
20.9 per 


cent 
cent 


$2,5961 


Estate tax 

Corporate capital stock 
tax 


82 
29 






Total taxes on wealth. . 
Distilled spirits 


318 

126 

158 

19 

71 

G 

37 

2 

26 

8 


2,707 or 70.5 per cent 
365 


Fermented liquors 

Tobacco 


118 

306 




37 




234 


Insurance 


15 




78 


Soft drinks 


7 


Admissions 


51 




22 






Total taxes on consump- 
tion, transactions, and 
commodities 


$ 


$1,183 or 29.5 per cent 
$3,840 


Total 





1 As the new taxes are payable in instalments, about 2 billions of the 1919 
tax will not be received until the fiscal year 1920. Making allowance for this, 
the proportion of taxes on wealth really ascribable to the year 1919 rises to 
80.6 per cent. 

It thus appears that the United States succeeded even better 
than Great Britain in carrying through a democratic fiscal pro- 
gram in the war; and that the Anglo-Saxon countries disclose a 
very decided contrast to all the other belligerents. The conse- 
quences are apparent in the relatively more favorable situation 
in which Great Britain and the United States find themselves 
when confronting the problems of post-bellum finance. 



IV 

With the impossibility of securing more than a comparatively 
small proportion of the war expenditures from taxation, it became 
necessary everywhere to resort to borrowing. This was conse- 
quently done by all countries on a gigantic scale; although here 
again the fiscal and economic conditions in the various countries 
varied so widely that they employed quite diverse expedients. 



762 Edwin R. A. Seltgman [December 

Great Britain provided at the outset of the war for immediate 
needs by selling short-time securities, principally treasury bills. 
Before long, however, these had accumulated to such an extent 
that it became imperative to issue long-time bonds. Accordingly, 
subscriptions were invited to the first war loan which was issued 
in March, 1915, followed in June of the same year by a second war 
loan. These bore interest at the rate of 31/2 P^r cent and 4I/2 
per cent respectively and the amount issued was 332 and 592 mil- 
lions sterling or 1,703 and 2,883 million dollars respectively. On 
February, 1916, an issue of war savings certificates was inaugu- 
rated. In April, 1917, the third war loan was issued at 4.5 per 
cent, yielding 941 millions sterling, or 4,403 million dollars, fol- 
lowed in June of the same year by an issue of 5 per cent exchequer 
bonds. 

Beginning in October, 1917, a continuous issue of 4 per cent and 
5 per cent national war bonds was made, the difference in the rate 
of interest being due to the tax exemption. The temporary and 
short-time paper was now gradually funded into these bonds. In 
the meantime the Anglo-French loan of 500 million dollars, of 
which England had one half, had been contracted in the United 
States ; and with the entrance of the United States into the war, 
continually larger sums were borrowed from the American gov- 
ernment. By the end of 1918, as will be seen from table M, 
almost 4 billions sterling, or considerably more than one half of 
the new debt, was in the form of relatively long-time domestic se- 
curities. ;f 

France was in a less favorable situation than Great Britain at 
the outbreak of the war. The total debt of France at the close 
of 1913 amounted to 32,594 million francs or 6,291 million dol- 
lars, and the ordinary budget had closed with a large deficit, so 
that it had been necessary to issue a loan during the spring and 
summer of 1914. When the war broke out, precipitating an eco- 
nomic and financial crash, it became practically impossible io issue 
another loan. The government was therefore compelled to rely 
upon advances from the Banque de France which was permitted 
correspondingly to increase its note issue. It was not until No- 
vember, 1915, that France saw her way to invite subscriptions to 
her first war loan, which, although bearing interest at the rate of 
5 per cent was issued at the low price of 871/4. This was fol- 
lowed in August, 1916, by the second war loan, also of 5 per cent 
bonds. In December, 1917, the third war loan was contracted and 



1919] The Cost of the War and How It Was Met 763 

in 1918 the fourth war loan. In these two latter cases France 
reverted to her old policy of discount bonds so that the issues 
fetched the price of only about 70. The nominal subscriptions to 
the loans were therefore quite different from the actual receipts in 
cash. Even the nominal sums yielded by these four loans, how- 
ever, amounted to less than 70 billions of francs, so that the chief 
reliance of France had to be placed on floating debts like advances 
from the bank of France, on the so-called national defense bonds, 
which were issued continuously from February, 1915, and, finally, 
on the foreign loans contracted in England, United States, and 
Japan. The internal loans as a consequence constitute only about 
40 per cent of the war debt, a result which is now proving a serious 
embarrassment in the French program of fiscal reconstruction. 

Russia was the first of the Entente Powers to contract public 
loans. In September, 1914, Russia began with a 5 per cent issue 
at 94, followed at regular intervals up to the revolution of 1917 
by six more loans. At that time about 6 billion dollars had been 
raised by relatively long-time securities, constituting, however, 
only a very small part of the entire debt. 

Somewhat similar difficulties were experienced by Italy. The 
pre-war debt of Italy amounted to 13,636 million lire or 2,621 
million dollars. Italy started in 1915 with the so-called mobiliza- 
tion loan followed by the first war loan in July, 1915, and by 
further war loans in January of each of the following years. 
Every successive loan showed an increase of the interest rate and 
a decrease of the issue price, thus disclosing the growing fiscal 
difficulties. The total proceeds of the internal war loans, as ap- 
pears from table M, were only about 15 million lire. Italy, there- 
fore, had also to depend primarily upon short-time securities, like 
treasury bonds and exchequer bills, upon advances from the banks, 
and upon loans from the Allies. As a matter of fact, less than 
30 per cent of the new war debt consists of long-time internal 
war bonds. 

Of the Central Powers, Germany followed a different plan from 
the outset. She decided to rely at once upon comparatively long- 
time bonds rather than upon temporary or short-time securities, 
and for several years prided herself upon her superiority in this 
respect over Great Britain and France. In October, 1914, a large 
war loan was issued at 5 per cent. There followed in regular suc- 
cession eight more war loans bearing 4^/0 per cent and 5 per cent 
respectively. During the earlier years of the war, accordingly, 



764 Edwin R. A. Seligmcvn [December 

the loan situation of Germany must be pronounced to have been 
more favorable than that of the other belligerents. Toward the 
end, however, as the difficulties increased, the internal loans did 
not suffice and Germany, like France and Italy, was now com- 
pelled to depend more and more upon a makeshift policy. Never- 
theless, by the end of 1918, 98 billion marks out of a total war 
debt of 153 billions or about 6-i per cent of the whole, was in the 
form of long-time internal bonds. This was a better showing than 
that of any of the other countries. 

When the United States entered the war it depended for the 
time being on temporary war certificates. It was, however, soon 
decided to make a bold appeal to the public, and in June, 1917, 
subscriptions were invited to the first liberty loan, which was is- 
sued at par bearing interest at the rate of 3^ per cent. Al- 
though the immense sum of 2 billion dollars was raised by the first 
loan, still greater efforts were made in the succeeding loans. In 
November, 1917, the second liberty loan was issued and, despite 
the original objections of Secretary McAdoo, it was found neces- 
sary to raise the rate of interest to 4 per cent. The loan A'ielded 
almost 4 billion dollars. In May, 1918, the third liberty loan was 
issued at 4^4 per cent interest, yielding over 4 billions. The 
greatest effort was, however, made in January, 1918, when sub- 
scriptions were invited to the fourth liberty loan, bearing 4^4 
per cent interest, with a result that the unheard of sum of almost 
7 billion dollars was subscribed. The last, or victory loan, was 
issued in April, 1919, bearing 4% per cent interest, and yielding 
about 514 billions. The consequence is that almost the entire war 
debt of the United States consists of relatively long-time and 
easily manageable domestic securities. In table M will be found 
the relevant facts as to the successive war loans of the chief bel- 
ligerents. 

Passing from the problem of long-time versus temporary loans, 
the final question is that of the total indebtedness of the various 
belligerents. 

In Great Britain it still seems to be a question as to whether 
and to what extent the loans to the Allies are to be included in the 
war debt. The Chancellor of the Exchequer, as stated above, 
thinks it prudent to include one half of the amount. The result 
is, as shown in table N, that the British debt which amounted to 
650 millions sterling, or 3,115 millions of dollars, just before the 
war, rose by the close of the fiscal year in 1919 to a total of 7,643 



Table M. — War I-oans. 
(In millions) 





Date 


Rate 


Issue price 


Amount 
subscribed 


Great Britain 








£ 


First war loan 


Mar., 1915 


3 V2 


95 


332 


Second " " .... 


June " 


4 i/o 


100 


592 


Third " " .... 


Apr., 1917 


4-5 


95 - 100 


941 


Exchequer bonds.. 


Mar., 1915 


3 


" 


48 


" " .. 


Dec, 1915 -Apr., 1917 


5 


100 


516 


" " . . 


Oct., 1916 


6 


" 


161 


National war bonds 


Oct., 1917 -Oct., 1918 


4-5 


100-100 Va 


372 


Total 


3,962 
fr. 


France 








First war loan 


Nov., 1915 


5 


87 1/4 


15,2051 


Second " " .... 


Aug., 1916 


" 


88 % 


11,5141 


Third " " .... 


Dec, 1917 


4 


68.6 


14,8031 


Fourth " " .... 


1918 




70.8 


27,8531 


Total 


69,3751 
li. 


Italy 








Mobilization loan. . 


Jan., 1915 


t '^^ 


97 


1,000 


First war loan .... 


July " 




93-95 


1,146 


Second " " .... 


Jan., 1916 


5 


97 1/2 


3,014 


Third « " .... 


" 1917 


« 


90 


3,985 


Fourth " " 


1918 


" 


86 1/3 


6,120 


Total 








15,266 
ru. 


Russia 








First war loan 


Sept., 1914 


5 


94 


500 


Second " " .... 


Mar., 1915 


" 


" 


500 


Third « " .... 


May " 


5-5 1/ 


99 


1,000 


Fourth " " 


Nov. " 


5 Vz ' 


95 


1,000 


Fifth " « .... 


Feb., 1916 




" 


2,000 


Sixth " " .... 


Oct. " 


" 


a 


3,000 


Seventh" " 


Mar., 1917 


5 


85 


2,500 


Total 


10,500 
Mk. 


Germany 








First war loan 


Sept., 1914 


5 


97 % 


4,480 


Second " " .... 


Mar., 1915 


" 


98 1/. 


9,106 


Third " " .... 


Sept. " 


" 


99 


12,162 


Fourth " " .... 


Mar., 1916 


4 Vo-S 


95-98 1/, 


10,767 


Fifth « « .... 


Sept. " 




95-98 


10,699 


Sixth " " 


Mar., 1917 


" " 


98 


12,979 


Seventh" " .... 


Sept. " 


« " 


" 


12,626 


Eighth « « .... 


Mar., 1918 


" " 


" 


14,789 


Ninth " " .... 


Sept. " 






10,434 


Total 


98,052 


United States 








First liberty loan.. 


June, 1917 


3 1/3 


100 


2,000 


Second " " . . 


Nov. " 


4 


" 


3,908 


Tliird " « .. 


May, 1918 


4^^1/4 


« 


4,177 


Fourth " " .. 


Sept. " 




" 


6,989 


Victory loan 


Apr., 1919 


4 % 




5,250 


Total 


22,225 





1 Nominal subscription. 



766 



Edwin R. A, Seligman 



[December 



millions sterling or $37,221 millions of dollars. Inasmuch, how- 
ever, as the Chancellor of the Exchequer asserted in his financial 
statement of April 30, 1919, that he expected to borrow about 
250 millions sterling, or 1,217 millions of dollars, during the year 
1919-1920, the debt of Great Britain at the end of 1920 will 
amount to almost 8 billions sterling or about 39 billion dollars. 
The war debt proper, therefore, at the end of that period may be 
expected to amount to 7^/4 billions sterling or 35, billion dollars. 

Table N. — Public Debt of Great Britaix. 
(In millions) 





Year ending March 31 




1914 


1915 


1916 


1917 


1918 


1919 


'Piinrlprl rlpVit 


£ 

587 

30 

li 

20 

650 


£ 
583 
28 
349 

77 
67 

1,104 


£ 

318 
26 
63 

900 

567 
177 

1 

9 

51 

2,133 


£ 
318 
24 
63 
20 
2,119 

464 

320 

74 

24 

317 

51 

4,011 


£ 

318 

22 

63 

16 

2,090 

649 

473 

392 

138 

23 

944 

51 

5,872 


£ 
318 


Terminable annuities 

3 i/o per cent bonds 

4 1/2 per cent bonds 

4 and 5 per cent bonds... 

National war bonds 

Treasury bills 


22 

63 

16 

2,090 

1,716 

947 


Exchequer bonds 

"War savings certificates . . . 
War expenditure certifi- 
cates 

"Other debts" . ... 


393 

227 

1,345 




51 


Total 


7,643* 







1 This includes £207 millions of sinlving fund premiums, which when deducted 
would bring the net debt to 7,435 millions. 

This total includes the loans to the Allies and Dominions: 
(In millions) 

Russia £568 

France 434 

Italy 413 

Belgium 87 

Serbia 19 

Other Allies 48 

Total Allies £1,568 

Dominions 171 

Total £1,739 

In France, where the pre-war debt was 32,594 millions of francs 
or 6,291 millions of dollars, the total debt at the end of 1918 
amounted to 167,469 millions or 32,322 millions of dollars, con- 
stituting a relatively more crushing burden than that of Great 
Britain. The war debt proper as will be seen in table O, amounted 
to 134,875 millions of francs or 26,031 millions of dollars. In- 



1919] The Cost of the War and How It Was Met 767 

asmuch, however, as it is virtually certain that a considerable sum 

will still have to be borrowed during 1919, the total war debt of 

France, will, in all probability amount to 27 or 28 billions of 

dollars. 

Table O. — Public Debt of France, December 31, 1918. 
(In million francs) 

Domestic debt 136,874 

Funded debt 67,739 

including: 3 per cent rentes 19,746 

5 " " " 25,853 

4 " " " 12,850 

4 " " " of 1918 30,000 

3 and 3 Vs redeemable 3,118 

Floating debt 49,136 

including: national defense bonds 29,463 

advances from Banque de France 18,000 

Foreign debt 30,595 

Funded debt 15,127 

including: advances from U. S. government 12,001 

Anglo-French loan in U. S 1,376 

other loans from U. S 1,602 

Japanese loan 147 

Floating debt 15,471 

Total 167,469=$32,322 

Pre-war debt in 1913 32,594= $6,291 

War debt 134,875=$26,031 

In Italy the pre-war debt was 13,636 millions of lire. At the 

end of October, 1918, as will be seen from table P, the total debt 

amounted to over 63 billions of lire or somewhat more than 12 

billions of dollars, making the war debt proper, about 50 billions 

of lire or 10 billions of dollars. By the end of May, 1919, the 

debt had grown to over 77 billions of lire or 15 billions of dollars, 

and the end is not yet. This represents a very disproportionate 

burden as compared with the British figures. 

Table P. — Public Debt of Italy, August 31, 1918. 
(In million lire) 

Pre-war debt 13,636 

War loans 14,737 

Treasury bonds 3,052 

Exchequer bills 9,240 

Foreign advances from England and the United States 13,850 

Advances from banks 6,536 

Notes issued by the government 2,041 

Total 63,093 = $12,177 

By May 31, 1919, the total debt had increased to.... 77,768 = $15,069 

For Germany, where the pre-war debt amounted to 4,732 mil- 
lion marks, the figures are not yet entirely complete. Minister 
Schiffer stated in February, 1919, that the debt had grown by the 
end of 1918 to 157,700 million marks. But Minister Erzberger 



768 Edwin R. A. Seligma-n [December 

stated in his Reichstag speech of October 31, 1919, that the total 
debt now amounted to 204 billions of marks, which would make 
the war debt over 199 billions of marks or 47,726 millions of dol- 
lars — the largest debt of all the belligerents. It must be remem- 
bered, however, that the great depreciation of the mark during the 
period when most of the debt was contracted reduces the actual 
American equivalent considerably. 

In Austria-Hungary, the pre-war debt was , 18,354 million 
crowns or 3,726 million dollars. In August, 1919, the new Aus- 
tria which by treaty assumed 70 per cent of the total war debt 
of the old empire had a war debt composed as follows : war loans, 
35 billion crowns; other war debt, 11^2 billions; bank notes, 50 
billions, or a total of 96^2 billions. At the rate of 70 per cent 
this would make the total war debt of the old empire now divided 
among various states, 137,858 million crowns or 28,584 million 
dollars. But the same caution as to the depreciation of the cur- 
rency must be observed here. 

In the United States the total net debt just before the entrance 
into the war, in April, 1917, was $1,190 millions. This had in- 
creased by June 30, 1919, to $24,232 millions, making a war 
debt of $23,042 millions. The debt, as appears from table Q, is 
composed almost wholly of war bonds, together with a relatively 
small amount of outstanding treasury certificates. Inasmuch, 
however, as somewhat over a billion dollars from the victory loan 

Table Q. — Public Debt of the United States. 
(In millions) 

Debt less Annual 
Date cash in interest 

Treasury charge 

Apr. 15, 1917 $1,189 $23 

June 30, 1917 1,909 84 

" " 1918 10,924 466 

" " 1919: Bonds: 

Pre-war bonds 833 

First liberty loan $1,985 

Second " " 3,566 

Third " " 3,959 

Fourth " " 6,795 

Victory loan (notes) 3,468 

20,455 

Treasury certificates 3,634 

Old debt on which interest increased 3 

Non-interest-bearing debt 236 

Total gross debt 25,485 

Cash on hand 1,252 

Net debt $24,233 $619 



1919] The Cost of the War and How It Was 31 et 



769 



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770 Edwin R. A. Seligman [December 

will be paid in the course of the current fiscal year, the total war 
debt of the United States by the end of 1920 will amount to over 
SJ* billions of dollars, or, deducting the loans to Allies, to about 
15 billions. 

The other countries need not be treated separately, especially 
as in a number of cases the details are not yet available. In table 
R an attempt is made to present a summary picture of the public 
debts of all the belligerents. From this table it appears that the 
total pre-war debt amounted to almost 28 billion dollars. On the 
other hand, the debt at the close of the war, including that of 
Japan (whose debt was increased only by a part of the funds raised 
to lend to Great Britain and France), but not including the debt 
contracted largely for internal and non-war purposes by the Bol- 
shevist government in Russia, amounted to over 224 billions of 
dollars. This would make the net debt of the world ascribable to 
the war about 196 billions. 

When we compare these figures with the total cost of the war, 
which, as we have seen, amounts to over 210 billion dollars, it ap- 
pears that well nigh the entire cost of the Avar will have been de- 
frayed from loans. The difference of some 15 billions derived from 
taxation is due almost wholly to the efforts of Great Britain and 
the United States, the former raising about 7 and the latter 
about 714 billions from taxation — Great Britain in a little over 
four and a half years, the United States in a little over two years. 
While a few billions additional were raised, as we have learned, by 
Italy and Germany from taxation, their contributions to the ex- 
penditures are more than offset by the budget deficits in those 
states as well as in France. It remains true, therefore, that the 
war was conducted almost entirely on credit. The outstanding 
problem now confronting every country, victorious and conquered 
alike, is how to secure the funds needed to defray the interest and 
to provide for the amortization of these gigantic debts, which 
offset a not insignificant part of the entire wealth of the Avorld. 

Edwin R. A. Seligman. 

Columbia University, 



LIBRARY OF ^°^9,^,nSl • 



021 394 575 



